Product shortage said not far off: Wine sales up as bulldozers work

Wine sales in the U.S. surpassed 300 million cases last year for the first time and continue to grow, according to Jon Fredrikson, respected wine analyst. And vineyard removal companies had another busy season pushing, piling and burning San Joaquin Valley vineyards, according to Nat DiBuduo, president of the largest wine grape marketing cooperative in California.

One of the most prominent bulk wine marketers in the world, Bill Turrentine of Turrentine Brokerage, Novato, Calif., says there are positive signs the huge 2005 California crop that produced an excess 1 million tons of wine grapes is disappearing, and a wine shortage is not far off.

And DiBuduo continues to warn: don't plant a vineyard unless you have an equitable winery contract.

DiBuduo says he continues to be “bullish” on the California wine grape business, yet he grows less convincing each year as he presents his grape market analysis at the annual Unified Wine and Grape Symposium in January in Sacramento, Calif.

With less than 5 percent of the state's 477,000 acres of wine grapes below full production because they are not fully mature, DiBuduo implies anyone who plants a new vineyard on speculation today has smelled too many plastic roses.

“Grapes were left hanging on the vine in '05 because of a huge crop and people asked me what grapes to plant; winery tanks were full in '06 and grapes were left hanging and people asked me what grapes to plant,” said a bewildered DiBuduo.

Rather than answer that stupid question, he points to the belching smoke of the bulldozers pushing out vineyards in Fresno and Madera counties this fall before the leaves were off the vines because the crop was not sold or sold at less than cost of production prices.

DiBuduo estimates 10,000 acres were added this fall and winter to the 100,000 acres of San Joaquin Valley vines taken out over the past five years.

“Crops other than grapes replaced many of those vines,” added DiBuduo.

DiBuduo, member of pioneering California wine grape growing family and himself a former grower, has in the past few years offered “light at the end of the tunnel and better times are ahead” scenarios at Unified's state of the industry session where more than 1,000 people pack a hotel ballroom to hear industry leaders predict the future.

However, one unexpected issue after another has beaten down DiBuduo to the point any more rosy or even semi-enthusiastic outlooks would make him look like the cruise director for the Titanic.

Last year it was California's major wineries buying large quantities of cheap, surplus wine from Australia rather than buying California grapes. It is legal for wineries to mix 25 percent foreign wine with California wine and give it an “American Appellation.”

The large '05 California crop did not foretell a good '06 grape price year, but the “American Appellation” issue was like heaping insult atop injury for growers.

Another issue that surfaced last season was inequality grading at the winery scales. This is an old issue, one that often surfaces when wineries want to reduce the tonnage purchased.

These two issues were in addition to the “hang time” controversy where wineries three years ago began demanding growers let grapes hang on the longer past normal harvest sugars ostensibly to improve quality. However, this also reduces the weight of the crops and the subsequent final grape price, and researcher are still debating whether it adds to wine quality. Growers know for sure it reduced tonnage and their final check. DiBuduo believes growers should be compensated for “hang time” losses.

DiBuduo also believes grape growers are not provided detailed information about grape sales, price point market information and varieties and vintages to make good production decisions or long range plans.

Despite the pullouts and the low percentage of nonbearing vines, DiBuduo says there remains an ever present potential of a big crop. This is largely due to the fact that over half of the wine grape vineyards are no more than 12-years-old with considerable upside yield potential in the future.

Higher yields

Plus, these vines are often planted closer and trellised differently than older vineyards to get more yield per acre without sacrificing quality. The eight-year average yield through '06 is 6.5 tons per acre. The potential, according to DiBuduo, is an average of 7 tons per year.

“If we have average yielding crops in the next two years, they would be two of the four largest wine grape crushes in history,” said DiBuduo.

Wine grape growers will be walking a tight rope over at least the next two seasons and maybe longer, looking over their shoulder to see if wineries continue to buy cheap imports rather than California grapes.

If demand increases significantly, the tight rope will be wider rather than narrower. However, growers cannot count on that.

Fickle Mother Nature may be more reliable than California wineries.

No one would mistake DiBuduo for Clint Eastwood, but it was Eastwood he imitated in painting a scenario for the 2007 California wine grape crop:

“Short Crop: Good

Average Crop: Bad

Long Crop: Ugly”

California wineries spend millions promoting their brands; however, these dollars would amount to little more than cork floating in a 5,000 gallon tank of Chardonnay compared to the free advertising they are now getting.

Respected wine market analyst Jon Fredrikson of Gomberg, Fredrikson and Associates, San Francisco, is the Pied Piper of the wine industry. Growers and vintners followed his every word and statistic as he detailed at the Unified Wine and Grape Symposium how wine sales reached the 300-million case sales plateau in 2006 in the U.S.

Total U.S. wine sales have soared by 129 million cases since the famous French Paradox television broadcast 15 years ago when the world learned the French are healthier because they drink wine.

And the media keeps on giving with:

Wine winning a positive image with the mainstream media.

Wine drinking visuals becoming commonplace on television.

Radio, Internet and television wine tasting shows.

Print and television advertising for other consumer products using a positive image like advertisements for Dr. Scholls and Fidelity Investments.

Media-run wine clubs.

Repeated stories of the health benefits of wine as detailed in health studies.

Fredrikson said this kind of publicity is worth “far in excess” of what is spent on wine advertising.

Total California wine shipments totaled 228.2 million cases in 2006, up 2 percent. Revenues climbed 8 percent to 8.2 billion. Per capita consumption in the U.S. remains meager, 2.4 gallons, compared with Italy, France and Germany where it ranges from 15 to almost 30 gallons per capita.

Business concentrated

Although there are about 2,000 wineries in California, three wineries, Gallo, The Wine Group and Constellation control 60 percent of the business. The top 10 companies control 82 percent of the shipments, according to Fredrikson.

As was pointed out repeatedly during the symposium, it is a growing global market with imported wines capturing 29.4 per cent of the '06 U.S. wine volume, up 10 percent from '04 compared to an overall market increase for wine sales of 3 percent. Much of this wine is being imported by California-based wineries.

This global consolidation is hurting the economics of California grape growers who are finding their grapes replaced by imported, cheap bulk wine. Fredrikson offered no indication that globalization and consolidation will slow down.

However, Fredrikson said if U.S. wine demand remains robust in 2007 and with relatively little new plantings in California, these consumption gains will eventually lift California grape prices.

Wine marketer Bill Turrentine offered a positive turnaround scenario for wine grape prices as he detailed the world supply of bulk wine at Unified.

Turrentine of Turrentine Brokerage of Novato, Calif., said the combination of flat California bearing acres and growing case sales will eventually result in California wine shortages.

Already, he is seeing price strengthening in some varieties, as the huge '05 California crush inventory is depleted. “We are working our way back and making progress,” he said.

However, Turrentine told growers and vintners not to expect a quick turnaround compared to the last glut/shortage cycle of about 12 years ago.

When prices strengthen for California grapes and wine, it will not be as crazy this time because:

It is easier to buy and sell wine on a global basis than it was a dozen or so years ago.

Worldwide wines are much better than they were in the mid-1990s. “Global wines are a better fit in the U.S. now.”

Wine shortages could last longer this time because more modest price increases stimulate less planting, and higher development costs make it more costly to develop new vineyards.

The recovery may have started, but it will be slower than before, he concluded.